Tuesday, 17 September 2013

Capital Flight to Exert Pressure on Naira

The anticipated acceleration of capital flight in the country in the next 18 months has been identified as the real risk to the stability of the beleaguered naira.

A report that disclosed this, argued that it was capital flight that derailed the naira in 2011, adding that this would also cause a similar shock to the nation’s currency in the months preceding 2015 elections.

The report by the CSL Stockbrokers, a division of First City Monument Bank (UK) Limited, made available to THISDAY at the weekend, indicated that the country’s real effective exchange rate (REER) “now looks strongly overvalued.”

Despite various measures aimed at calming the depreciation of the naira against the dollar, the nation’s currency has continued to face intense pressure against the greenback. While the Central Bank of Nigeria (CBN) has continued to demonstrate its capability to defend the nation’s currency at the official market, the naira has recorded strong volatility at the interbank, bureau de change and parallel markets as the gap between the official and other segments continues to widen.

For instance, at the interbank, the naira closed last Friday at N161.95 to a dollar last Friday. It had reached a year-low of N164.07 to a dollar the preceding Friday at the interbank. Also, at the BDC and parallel market points, the naira stood at N164.50 to a dollar and N165 to a dollar respectively last Friday. Nevertheless, at the official market, the naira has maintained its value of N155.76 to a dollar.

But the CSL report noted that there were reasons to believe that the scale of the problem would not be as bad as 2011.

“As the CBN convincingly argued in our recent discussions, oversight has improved. Net open forex positions for banks have been restricted; access to WDAS has been limited to legitimate import demand; and rules have been introduced around the use of the standing lending facility (SLF).

“Most importantly, real interest rates are now positive (and attractive) while confidence in local investment prospects – whether in the bond market, the stock market, or elsewhere – has improved. In other words, foreign investment is likely to be stickier than some commentators believe, and local capital is less mobile than it was,” it explained.

Furthermore, it stated that both the International Monetary Fund’s index (base year 2005) and the CBN’s (base year 2009) suggests that fair value for the naira is N202/$1 – around 20 per cent below current market rates.It added: “Does this mean the naira is going to N200/$1? Not really, we would argue. The reason an appreciating REER worries investors is that an overvalued currency will cause imports to become progressively cheaper, the presumption being that they will grow until the central bank encounters a funding problem and has no choice but to devalue.

“Thankfully, the reality in Nigeria is quite different: imports were down 14 per cent year-on-year in first quarter 2013 and have not grown significantly in absolute terms since early 2010.

“Even if we include the ominously large net errors and omissions (some portion of which is inbound trade), imports are down year-on-year and relative to their long-term average. Unless we see another episode of rapid and unsustainable import growth, as we did in 2010, we will not interpret an overvalued REER as the sign of a looming nominal devaluation – and neither should the market, in our view,” it added.